This editorial by Jeffrey Scharf was published in The Santa Cruz Sentinel on April 18, 2019. Scharf is an investment advisor and regular Santa Cruz Sentinel columnist.
Florida Drug Plan Too Good to be True
Drug re-importation is back in the news. Florida’s Republican Gov. Ron DeSantis wants the state to import drugs from Canada. The state would pay the Canadian wholesale price and redistribute the drugs to Floridians.
This piggy-backs on similar legislation passed last year by the state of Vermont. It also echoes the resolve of politicians from both parties to reduce the high prices paid by Americans to the lower prices paid by other advanced countries.
Foreigners pay less for drugs because foreign governments control prices. The U.S. government does not. An unknown number of Americans already purchase their drugs in Canada. Florida and Vermont would simply follow their lead on a larger scale.
This sounds too good to be true. And it is.
Drugs are generally sold by pharmaceutical manufacturers to wholesalers. The wholesalers sell the drugs to pharmacies. Pharmacies provide the drugs to patients.
Pharmaceutical manufacturers sell drugs to Canadian pharmacies based on the needs of the Canadian population of 37 million. There are not enough drugs in Canada to supply 37 million Canadians and 21 million Floridians. Pharmaceutical companies are not foolish enough to sell extra drugs to Canada only to watch them return to the U.S.
Moreover, it would difficult if not impossible to ensure that re-imported drugs are genuine. Drug counterfeiting is a huge business. Tracking a drug from factory to wholesaler to patient is daunting within the U.S. Making sure an unscrupulous Canadian vendor was not supplying phony pills made in a place like China would be magnitudes worse.
At any rate, the real reason U.S. patients pay so much for drugs is that Canadians and others pay too little. It takes time and money to discover, test and commercialize new drugs. The money comes from the profits on those few compounds that make it through the process. The lion’s share of profits come from the high prices paid by U.S. patients.
Canadians and other are involved in a classic case of free-riding. They get all the benefits of medical innovation while Americans bear a disproportionate share of the costs.
This is an area where presidential outrage at unfair trade practices would make sense. Foreigners are cheating us out of billions of dollars. If foreigners were paying their “fair share,” companies could charge U.S. customers less while making the same amount of money.
What about simply reducing U.S. prices to foreign levels? This is OK for those who think that today’s medicines are all we need. But for those who want better treatments tomorrow, profits that can be invested in innovation are a necessity.
This is not to say that pharmaceutical companies are angels or that pricing abuses do not occur. Developing multiple sources for generic drugs, competitive bidding for patented drugs, restricted advertising, transparent pricing, public shaming and other steps are partial solutions. Meanwhile, the side effects of turning the worldwide pharmaceutical industry into a low-margin, public utility may as bad as the disease